Whether ‘Abenomics’ works or not, Japan is still a buy

published 15 December 2014

141215-abenomics — Election-winning PM Shinzo Abe: reforms are good news forJapan's stockmarkets

It's rare to find a developed democracy where the result of a general election can be predicted with near-certainty.

But there was no doubting who would win yesterday's snap election in Japan.

Prime minister Shinzo Abe has now been given the go-ahead by voters to keep ploughing on with his Abenomics plan to revitalise Japan.

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Will it work? Who knows?

But investors can certainly make a lot of money along the way.

Reforming Japan will be difficult but it's not the key bit for investors

It might have seemed odd to call an election at this point. He's only been in power for two years. But in fact, it might have been a very smart move.

You see, he's done the easy bit. His popularity is still high. So he might as well lock in a couple of extra years in charge while he can. Because now it's going to get harder.

Abe has already very visibly changed Japan's economic backdrop by pushing the Bank of Japan to print unprecedented amounts of money. Now he has to get on with pushing through his Abenomics' reforms.

This is the tricky bit of transforming' Japan. For example, Capital Economics reckons that Japan needs to boost productivity by addressing the problem of its ageing workforce. That would require things like boosting the number of women working, allowing "large-scale immigration" and reducing protection for full-time employees while "easing restrictions on temporary work".

Printing money is one thing. It's fast and exciting and it has an obvious impact. Culture change is quite another. It's slow and difficult and people will fight you every step of the way.

On top of that, he's got the unpopular task of switching the country's nuclear reactors back on.

However, from the perspective of an investor, this may not matter. It's the quantitative easing (QE) that makes stocks go up, and the currency go down. And that's already having some significant effects.

In a column in the FT, Japan old hand Peter Tasker flags up some surprisingly bullish data on an economy that's currently in recession.

"Occupancy rates for Tokyo and Osaka hotels are at 22-year highs as big-spending Asian tourists flood into the country in the past year alone, visitor arrivals from mainland China rose 80%." This tourism boom has been driven by the plunging yen.

And as Tasker notes, "once companies are convinced that the new super-competitive yen is here to stay" they will respond by starting to change their investment plans too. He reckons "conditions are ripe" for companies to start "reshoring production".

We've seen what shale-driven reshoring' has done for the US. Given that Japan is starting from a position of much lower unemployment, any boom in investment in new facilities could ultimately lead to "labour shortages" and rising wages. In fact, according to the latest survey of business sentiment, labour conditions are already tighter than at any time since the early 1990s.

Rising wages will in turn boost inflation, consumer demand and corporate profits. All of which should be good news for share prices.

There are plenty of reasons to be optimistic on Japan

Japan is the "world's largest creditor". For example, it owns a lot of US government IOUs. In yen terms, the value of those assets has shot up. Throw in the rising stock market, and rising property values, and "you have a massive invisible strengthening of Japan's balance sheet."

The collapsing oil price is also good for Japan, which imports almost all of its fuel. Ryutaro Kono of BNP Paribas, quoted in The Telegraph, notes: "It's a godsend for Abe" the crash in oil prices is equivalent to a tax cut of 1% of GDP. So it goes some way to offsetting the recent rise in the sales tax.

Even although the Bank of Japan is trying to push inflation higher, falling oil prices are still good news on that front. As we've noted many times before, a drop in the oil price leaves more money available for other uses. So in the longer run, a falling oil price is inflationary in that it boosts demand - rather than deflationary.

In short, there's plenty of good news for Japan at the moment beyond Abe's re-election. Yesterday's vote is just yet another reason to hang on to your Japan investments, and to buy some if you haven't already.

We recently wrote about some of the best ways to invest in Japan in MoneyWeek magazine.If you're not already a subscriber, get your first four issues free here.

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.